Wednesday, November 08, 2006

At the MIT economics alumni event this morning, Jerry Hausman spoke about his research on Wal-Mart. He says that Wal-Mart lowers prices to consumers primarily by bargaining down the prices charged by suppliers, such as Procter and Gamble. It also uses cost-saving logistics. Lower labor costs may contribute to its low prices, but not as much as the other factors.

Hausman argues that driving down prices of suppliers is a benefit, because prices are being driven closer to marginal cost. In welfare-economics terms, you can think of Wal-Mart as a substitute for a regulator who would try to improve efficiency by forcing imperfectly competitive producers to move down the demand curve.

The magnitude of the benefit is enormous. Hausman looked at food, and for that category alone Wal-Mart increases consumer welfare by 25 percent (I'm a bit worried that the theory behind his calculations holds only for much smaller differences, but I don't have an alternative.) Since food is about 12 percent of GDP, multiplying .25 by .12 gives a benefit of .03, or 3 percent of GDP from Wal-Mart.

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Oh, and by the way, Hausman finds that poor people get 50 percent more benefit from Wal-Mart than rich people.